24 October 2001 External T.I. 2000-0014095 - Clause 95(2)(a)(ii)(A)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the amount paid or payable for expenditures is deductible in computing the amount prescribed to be earnings or loss from an active business pursuant to clause 95(2)(a)(ii)(A) of the Income Tax Act in the specific situation outlined in the letter.

Position: Yes.

Reasons: Based on our interpretation of clause 95(2)(a)(ii)(A).

XXXXXXXXXX 2000-001409
S. Leung
October 24, 2001

Dear XXXXXXXXXX:

Re: Clause 95(2)(a)(ii)(A) of the Income Tax Act (the "Act")

We are writing in reply to your letter of March 13, 2000 in which you requested our confirmation of your view that the interest paid by US#2 to Irish Finco is income that is deemed, in the hand of Irish Finco, to be income from an active business pursuant to clause 95(2)(a)(ii)(A) of the Act in the following hypothetic situation. We apologize for the delay in reply.

The Hypothetic Situation

1. Canco was incorporated and is resident in Canada for purposes of the Act.

2. Canco owns all the issued shares of Canco#2, US#1 and US#2. Canco#2 was incorporated and is resident in Canada. US#1 and US#2 are corporations incorporated in the United States ("U.S.") and governed by subchapter C of the U.S. Internal Revenue Code.

3. Canco#2 owns all the issued shares of Irish Finco, a company incorporated and resident in Ireland.

4. US#1 and US#2 have formed a limited partnership ("USP") under the laws of a State in the U.S. to carry on an active business. US#1 is a general partner and US#2 is a limited partner of USP.

5. US#1 and US#2 have each made capital contributions to USP in return for their respective partnership interest in USP. Substantially all the funds used by US#2 to make its capital contribution to USP were obtained from the proceeds of an interest bearing loan (the "Loan") made by Irish Finco to US#2. The interest paid to Irish Finco by US#2 on the Loan is deductible in computing the income of US#2 for U.S. federal income tax purposes.

6. USP carries on an active business in the U.S. and employs a significant number of full-time employees. USP generates only active business income and has no property income or income from an investment business.

Our Comments

It is our view that in the situation outlined above, the interest paid by US#2 to Irish Finco on the Loan would be considered to be deductible by US#2 in computing the amount prescribed to be its earnings or loss from an active business carried on in the U.S. pursuant to clause 95(2)(a)(ii)(A) of the Act.

In this regard, we would like to point out that our position with regard to the source of interest expenses incurred by a partner of a partnership for the acquisition of an interest in the partnership as expressed in document #9716025, dated July 14, 1997, has been superseded by that stated in document #2000-0020335, dated June 15, 2000.

As stated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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